UNITED ARAB EMIRATES
According to recent government data, the United Arab Emirates’ (“UAE”) non-oil economy contracted 6.2 per cent in 2020 due to lower oil prices and the COVID-19 pandemic, the first contraction since 2011. Overall GDP in the Arab world’s second-largest economy is estimated to have contracted 6.1 per cent in 2020, slightly more than the International Monetary Fund’s (“IMF”) initial projections of a 6 per cent contraction.
Abdulla Bin Touq Al Marri, the country’s economy minister, commented that the UAE economy performed “better than expected in 2020” and that the decline was “comparatively low” compared to major global economies. Real GDP is expected to grow 3.1 per cent in 2021, according to the IMF.
In April 2020, the UAE Central Bank announced that it had extended until mid-2022 certain stimulus measures introduced last year to mitigate the impact of the COVID-19 crisis on the economy. A key such stimulus measure is the Targeted Economic Support Scheme (“TESS”) which helps banks provide temporary relief to companies and individuals affected by the COVID-19 pandemic and facilitates additional lending capacity through the relief of existing capital and liquidity buffers. Banks will continue to be eligible to access a collateralised USD 13.61 bn zero-cost liquidity facility until 30 June 2022 and financing provided by the bank for loan deferrals under the TESS scheme will be extended until the end of this year.
Capital Economics has estimated that non-performing loans in the UAE stand at 10.6 per cent of total loans, the highest ratio since 2005. S&P Global Ratings expects continued pressure from real estate oversupply as well as lower demand for the tourism, hospitality and aviation sectors to continue to weigh on banks' asset quality in the next 12 to 24 months. Nonetheless, it expects banks to maintain "adequate sources of funding and liquidity" amid a rebound in oil prices. On 20 April 2021, Emirates NBD, Dubai's largest bank, posted a 12 per cent increase in first-quarter net profit citing improving economic conditions from the COVID-19 pandemic fallout and a drop in impairments.
The UAE’s legal system was originally influenced by the principles of Sharia and Egyptian laws and procedures. Its legal system is based on the Constitution of the United Arab Emirates 1971 (“Constitution”). The federation has sovereignty in all matters assigned to it under the Constitution. The individual member Emirates have sovereignty over their own territories in all matters not in the exclusive jurisdiction of the federation, as set out in the Constitution. In addition, each Emirate has a hereditary ruler who exercises considerable sovereignty over his own Emirate.
The UAE (save for courts established in certain free zones) operates under a civil law system and statutes are the primary source of law. Judgments of the higher courts are not binding on the lower courts.
The UAE has created more than 45 economic free zones to attract international firms and fuel its economy. The leading free zones are self-governing and free from state interference, which in some cases created a parallel judiciary structure, based on the Anglo-Saxon Law. For instance, the Abu Dhabi Global Market (“ADGM”) is the first jurisdiction in the Middle East to directly apply the well-established and internationally accepted principles of English common law. It is anchored by a judiciary of highly experienced and eminent judges from the world’s leading common law jurisdictions. The ADGM Courts are comprised of a Court of First instance and a Court of Appeal that handle civil and commercial disputes. This judicial structure is well regarded by international players and offers counterparty confidence. Additionally, whilst Dubai International Financial Center (“DIFC”) laws and regulations are developed by its proper authorities, they are also derived from English common law.
KEY POINTS FOR TRADERS
- Banking licence not required for non-resident lenders granting bilateral credit facilities or participating in syndications.
- Assignment is the most common method of transfer.
- Secured debt is transferable via assignment or sub-participation
- Uncertainty over recognition of foreign trusts and agency but these are generally recognised in the DIFC
- No withholding tax is charged on interest.
BANKING LICENCE REQUIREMENTS
The two main authorities and regulatory bodies responsible for licensing and regulating financial services in the territory are the UAE Central Bank and the Securities and Commodities Authority (“SCA”). The Central Bank and SCA have jurisdiction over financial operations undertaken in the mainland (i.e. outside of the free zones) pursuant to Federal Law No. (14) of 2018 (“UAE Banking Law”). UAE Banking Law does not apply to the free zones or financial institutions established therein. The Central Bank does, however, have the right to exercise its powers over financial institutions outside the UAE or in free zones after consulting the relevant authority.
The Central Bank’s Finance Companies Regulation applies to conventional finance companies and Islamic Finance companies conducting the permitted financing activities listed in its Article 10. These permitted financing activities include retail, mortgage and wholesale finance as well as pre-paid cards and distribution of third-party products.
Non-resident lenders can grant bilateral credit facilities and participate in syndications in the UAE. They are not deemed to be resident, domiciled or carrying on business in the UAE.
Foreign lenders often carry out financial services activities in the UAE’s economic free zones which have put in place their own regulating authorities. For example, the DIFC has an independent financial services regulator, the Dubai Financial Services Authority (“DFSA”). The DFSA has adopted a regulatory approach modelled, in part, on the former Financial Services Authority in the UK. The DFSA does not grant banking licences as such. Rather, it authorises financial service providers to undertake specific financial services including providing credit and accepting deposits.
Similarly, the ADGM has established the Financial Services Regulatory Authority which aims to reflect internationally recognized standards. Like the DFSA, the FSRA does not grant banking licences per se. Banks licensed in the ADGM are prohibited from accepting deposits from the UAE market, and may not accept deposits or undertake foreign exchange transactions involving UAE AED.
METHOD OF TRANSFER
Loans are commonly transferred by way of assignment of rights and obligations. This form of transfer by way of assignment of rights and obligations is similar to the English law concept of assignment and assumption.
The English law form of novation is not used to transfer debt as it will have the effect of releasing any guarantee or security given in respect of the original contract.
Secured debt is transferable via assignment or sub-participation where all or part of the loan is transferred, on a funded or unfunded basis. The Mortgage Law No. (14) of 2008 provides that mortgage rights can expressly be assigned by the mortgagee without the consent of the mortgagor. Such assignment must be registered to enforce its validity against third parties.
Notification and consent requirements differ depending on the nature of the security, the provision of the original agreement and the parties in play. However, most UAE law governed facilities will require borrower's consent. In the absence of any express provisions, notice must be given to the borrower and any guarantors of the transfer of the debt for it to be effective by law.
SECURITY AND TRUSTS/AGENCY
To date, there is not a clear understanding of UAE law relating to the recognition of foreign agency or trusts. In practice, to avoid uncertain legal repercussions, it is common for interested persons to form a legal entity which owns the foreign trust.
The concept of trust is recognised in the DIFC and governed by DIFC Law No. 4 of 2018 (the "DIFC Trust Law"). A foreign trust will be recognised and enforced in the DIFC provided that it is not contrary to DIFC law and the DIFC Court does not declare the trust to be immoral or contrary to DIFC public policy. The agency concept is also recognised in the DIFC and is codified in Law No. 5 of 2005, the DIFC Law of Obligations and under the DIFC Trust Law.
The use of security trustees and/or security agents is common in the DIFC for secured loans issued in Dubai. Although, DIFC courts generally recognise foreign law governed trusts and agency set-ups, it has been not been tested and therefore remains unclear.
Security over immovable assets is not granted to foreign financial institutions in the UAE unless they have been duly licensed in the relevant Emirate where the immovable assets is located. However, in practice, unlicensed foreign banks lending to Emirati debtors are appointing a local security agent to hold the locally located security on their behalf.
Federal Decree-Law No. (19) of 2019 sets out the management of liquidation proceedings and stipulates that, where a creditor has a security over a sold asset, the trustee shall distribute the proceeds of sale thereof to creditors as per their order of preference.
TAX AND STAMP DUTY CONSIDERATIONS
Currently, there are no stamp duties or withholding taxes imposed in the UAE in respect of:
- Interest payable on loans made to domestic or foreign lenders; and
- The proceeds of a claim under a guarantee or the proceeds of enforcing a security.
VAT was introduced in the UAE in 2018 at rate of 5 per cent and applies to the majority of commercial transactions.
A tax is also levied on the transfer of ownership of property at a rate of 2 per cent in Abu Dhabi and 4 per cent in Dubai of the fair market value of the asset. Such property tax is also applicable to any direct or indirect transfer of shares in an entity that owns the property asset.
FORMALITIES, NOTARY REQUIREMENTS AND ENFORCEABILITY
Security over an immovable asset in the UAE is perfected by way of execution of an Arabic land mortgage agreement between the creditor and the debtor in the presence of a notary public or the relevant land department. The land mortgage agreement is then provided to the mortgage registrar with the land department or the local municipality of the relevant Emirate.
Federal Law No. (4) of 2020 on Securing Rights over Moveable Assets provides three methods to ensure security rights are enforceable against third parties:
- Registering the security on the online register;
- Delivery of a possessory pledge to the pledgee; and
- Control of the pledge by the pledgee
Under UAE Federal Law No (5) of 1985 (as amended), a creditor seeking to enforce a guarantee is required to first notify the guarantor of the debtor’s default by serving a legal notice in accordance with the terms and conditions of the guarantee.
Although there are no applicable documentary taxes, a 0.25 per cent fee is imposed on the transfer of securities.
Additionally, loan and security documents are required to be in Arabic and notarised by a notary public in three copies. There is a notarial fee of 0.25 per cent of the secured amount, capped at AED 16,000.
DECREE LAW NO. 26 OF 2020 (“DECREE”)
The Decree, expected to come into force in July 2021, is intended to revolutionize the UAE’s business platform to make it more attractive to its current players and new foreign investors.
The Decree covers a number of important legislative developments relating to the corporate environment within the Emirates and is considered to be a notable initiative to drive foreign direct investment. In particular, it abolishes the requirement for a 51 per centEmirati participation in the share capital of companies incorporated in the UAE outside of the free zones, subject to meeting certain requirements. Save for in relation to a limited type of companies carrying out national key activities in the UAE, this will allow foreign investors, natural persons or legal entities, to wholly own “onshore” limited liability companies as single shareholders. It will also permit foreign companies to establish branch offices in the UAE without needing a local sponsor.
UAE INSOLVENCY REGIME
The insolvency regime put in place by UAE legislators is aligned with the international best practice of jurisdictions including the US and France (among others). It differentiates between legal persons (companies, traders, and licensed civil companies carrying out professional activities) which are governed by the Bankruptcy law (Decree No. (9) of 2016) and individuals (civil debtors) who are governed by the Insolvency Law (Decree-Law No. (19) of 2019).
Both Decrees ensure a process for a voluntary settlement and allow creditors to monitor the reimbursement plan under a method labelled “Preventive Composition”. This has created a secure environment for commercial and retail lending which in turn has promoted the circulation of funds and the local economy.
DUFRY AG (“DUFRY”)
Switzerland-based travel retailer Dufry, whose predominate focus is in airport travel retail, operates more than 2,300 shops worldwide including at airports and on cruise liners. Like many businesses in the travel retail industry, it has faced COVID-related operational challenges, posting a 68 per cent decrease in turnover in Q1 2021 compared with Q1 2020.
However, CEO Julián Díaz commented that there are “encouraging signs” for a resumption of travel trends and shop re-openings, with an expected sales capacity of 75 per cent by the end of June, rising to 80 per cent by summer 2021. As Dufry waits for travel conditions to improve, the company has put in place an extensive cost-saving plan, claiming to be on track to achieve savings of up to USD 747m in 2021. Additionally, airport rent reliefs for 2021 total a further USD 335m.
Dufry has a well-established presence in the senior notes market and its issuance of bonds has been an important source of financing for the company. It has issued five unsecured Senior Notes with maturity dates ranging from 2024-2028.
The most recent issuances include a CHF 500m convertible bond issuance on 23 March 2021 at a rate of 0.75 per cent with a 2026 maturity and two issuances on 15 April 2021. The first was for CHF 300m at an interest rate of 3.625 per cent with a 5-year maturity whilst the second was for EUR 725m at an interest rate of 3.375 per cent with a 7-year maturity.
Moody’s updated Dufry’s outlook from negative to stable on 13 April 2021 following the 2021 bond issuances which bolstered the company’s liquidity, presently standing at CHF 2,213.7m. Dufry currently holds a B1 Corporate Family Rating and a B1-PD Probability of Default Rating.
VIRGIN ACTIVE LIMITED (“VIRGIN ACTIVE”)
On 12 May 2021, the High Court sanctioned Virgin Active’s Part 26A restructuring plan despite opposition from a majority of creditors. The proposal includes plans to terminate the leases of poorly performing gyms and reduce rent on other properties. The decision represents a victory for tenants and a further blow for landlords following the New Look decision earlier in the week which allowed the retailer to press ahead with its restructuring plans following legal action from its landlords.
British Property Federation has said the Virgin Active judgment “sets a dangerous precedent”, with other companies now likely to seek a reduction in their debt pile using the same restructuring tool. The cross-class cramdown tool, modelled on schemes of arrangement, allows a restructuring plan to be confirmed by English courts even where one or more classes do not vote in favour of it. As such, a class of creditors who vote in favour of an arrangement are, in effect, allowed to “cram-down” dissenting classes of creditors. Prior to the pandemic, UK’s standard restructuring tool to deal with unsecured creditors, such as landlords, consisted of a company voluntary arrangement, which requires approval by 75 per cent of relevant creditors.
In particular, Justice Snowden ruled that with the restructuring plan “no member of a dissenting class will be any worse off than they would be in the relevant alternative” i.e. they were “out of the money” either way. Accordingly, the court attached little weight to the fact that a large number of landlords voted against the plan and ensured that the creditors “in the money” had the say on what happens to the company, irrespective of the fact that certain voting thresholds were not met.
The Virgin Active decision is likely to encourage the use of the Part 26A cross-class cramdown tool in circumstances where creditors who are “out of the money” but represent a large part of the creditor body in value are likely to obstruct the approval of a CVA.
REGIS U.K. LTD (“REGIS”)
On 17 May 2021, the High Court ruled against landlords seeking repayment of fees against nominees of the Regis CVA implemented in 2018. The court ruled to revoke the CVA for the chain of hairdressing salons on the basis that the arrangement’s treatment of one creditor was unfairly prejudicial to the landlords. However, since the CVA was previously terminated in late 2019 and the court rejected the landlords’ other arguments against the CVA (adopting the same reasoning as in the New Look decision), the revocation finding will have no practical effect.
Although Justice Zacaroli found that the nominees had breached their duties by recommending the proposal without sufficient inquiry as to the treatment of International Beauty Limited as a critical creditor, the court did not order the former nominees/supervisors to repay their fees. Justice Zacaroli stated it would “not be appropriate” in the absence of bad faith or fraud which were not suggested in this case, to deprive the nominees of its fees, particularly where the services provided were not without value. Whilst the decision is welcome relief for the insolvency practitioners concerned, Justice Zacaroli did not rule out the possibility that the Court might have jurisdiction to make an order of this kind should the correct circumstances arise.
The consequential revocation of the Regis CVA was only a minor success for the landlords as their primary motive to create a meaningful precedent to inhibit the future use of retail CVAs was thwarted. Therefore, the decision is likely to have a limited impact on the shape or drafting of future proposals and retailers can feel reassured that CVAs remain a viable and useful restructuring tool.